key financials (consl.)breport.myiris.com/sfspl/graindus_20130719.pdfhuge expansion in the cement...

Higher growth from VSF business Grasim industries the pioneer and only manufacturer of VSF in India with global market share of 21%, is expanding its VSF capacity by 47%. In the last four years the company’s VSF sales volume has grown at a CAGR of 9% p.a. Thus considering stable growth in demand due to increase in demand of manmade fibres, the company is increasing its VSF capacity from current 333 KT to 490 KT by H2FY14. It is setting up a greenfield plant at Vilayat of 120 KTPA and is also expanding capacity at its Harihar plant by 36.5 KTPA to 87.5 KTPA at a cost of Rs.21.7 Bn. Expansion in the Harihar plant has just completed while that of Vilayat will be completed by H2FY14. Its sales are thus likely to grow at a CAGR of 18% for the next two years backed by volume growth of 15%.

Huge Expansion in the Cement Business The company’s cement division, Ultratech Cement, has laid huge expansion plans preparing it to tap higher market share during uptick in cement demand. It is expanding its capacity from the current 53.9 MMT to 63.1 MMT by H2FY14 at a cost of Rs.67.6 Bn. It is setting up two plants one in Chhattisgarh of 4.8 MTPA and other in Karnataka of 4.4 MTPA. This is likely to be commissioned by H2FY14. It has also announced brownfield expansion at its Shambhupura, Rajasthan plant of 2.9 MTPA to be commissioned by FY16 at a cost of Rs.20 Bn. Its cement division is thus likely to grow at a CAGR of 9% for the next two years backed by volume CAGR of 7%.

Cement Capacity Overhang – Short term blip Cement is a cyclical commodity with a high correlation with GDP, growing at around 1.2x of GDP. The industry is reeling under lower capacity utilization (~70%) pressure due to rapid capacity addition and relatively slower demand growth. However now considering the political and current economic scenario, setting up a new greenfield project is quite challenging due to dawdling Land acquisition and environmental approvals, logistical viability (higher freight cost) and fuel availability. We believe that apart from the 60MT announced capacity addition for the next two years by the cement players, there is not going to be any huge capacity addition after FY15. This will result into slower capacity addition, thus resulting in higher capacity utilization rates and profitability. Also higher infrastructure spending, robust growth in rural housing and peaking interest rates are likely to augur well for the cement industry going ahead. Indian Economy seems to have bottomed out in FY13 with a decade low GDP of 5%. Cement industry having high correlation with GDP is thus likely to see moderate to high growth in the coming few years with improving utilizations levels.

OUTLOOK & VALUATION Grasim Industries has a balanced business portfolio with exposure to textiles – stable cashflow generating business, chemicals and cement. Till date, the company was deploying cashflows from the VSF business to fund its cement expansion. As majority of the capex is close to completion, its balance sheet is likely to strengthen further with debt peaking out in FY13. The company’s gross D/E is likely to come down from 0.5x in FY13 to 0.3x in FY15. As of FY13, the company has Cash & Cash Equivalents of Rs.66.7 Bn providing comfort for future expansion. With this timely expansion the company is ready to ride the next uptick in cement and VSF cycle. Company’s sturdy business model, market leadership, strong balance sheet and good profitability margins instills confidence. The stock is currently trading at FY15E EV/EBITDA of 3.6x. We thus recommend ACCUMULATE for the stock, with strong BUY on dips for a longer term horizon and a target price of Rs.3341. We have valued the stock on SOTP basis, valuing the VSF business at 4x EV/EBITDA and Cement business at 9x EV/EBITDA with 30% holding company discount.

KEY FINANCIALS (Consl.)

Y/E Mar. Revenue (Rs Bn)

RPAT (Rs Bn)

EPS (Rs.)

EPS (% Ch.)

P/E (x)

ROCE (%)

ROE (%)

P/BV (x)

FY12 252.5 26.6 289.7 16.5 9.7 17.5 16.8 1.5

FY13 279.0 27.0 294.6 1.7 9.5 10.8 14.7 1.3

FY14E 297.6 26.7 291.2 (1.2) 9.6 10.1 12.8 1.2

FY15E 331.0 30.1 327.9 12.6 8.6 10.5 12.8 1.0

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member: BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435.

Regd. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

Grasim Industries Ltd.

July 19, 2013 ACCUMULATE MEDIUM RISK PRICE Rs.2805 TARGET Rs.3341

Initiating Coverage

STRENGTH: Sturdy business model – exposure to Cement, Textile & Chemicals, Backward integrated operations, Market Leadership in both VSF and Cement, Strong balance sheet- Lower leverage despite of heavy expansion and huge cash and cash equivalents. WEAKNESS: Dependent on

Infrastructure expenditure, Cotton Availability and Price. OPPORTUNITIES: Higher infrastructure

spending, robust housing demand. THREAT: Delay in Revival of economy, Rapid Cement Capacity Addition.

Textile & Cement

SHARE HOLDING (%)

Promoters 25.5

FII 37.5

FI / MF 15.3

Body Corporate 7.6

Public & Others 14.1

STOCK DATA

Reuters Code Bloomberg Code

GRAS.BO GRASIM IN

BSE Code NSE Symbol

500300 GRASIM

Market Capitalization*

Rs.2,57.3 Bn $ 4.3 Bn

Shares Outstanding*

0.1 Bn

52 Weeks (H/L) Rs.3511 /2576

Avg. Daily Volume (6m)

66,810 Shares

Price Performance (%)

1M 3M 6M

1 - (8)

*On fully diluted equity shares

200 days EMA Rs.2926

Part of Bonanza

ANALYST Ishpreet Batra | +91 22 4093 5091 [email protected]

SALES Devang Shah | +91 22 4093 6060/61

[email protected]

mailto:[email protected]

mailto:[email protected]

July 19, 2013 2


COMPANY BACKGROUND

Grasim Industries Limited, a flagship company of the Aditya Birla Group, ranks amongst India's largest private sector companies, with a consolidated net revenue of Rs.279 billion and consolidated net profit of Rs.27 billion (FY 2013). Grasim started as a textile manufacturer in 1948. Today its core businesses are Viscose Staple Fibre (VSF) and Cement, contributing over 90 per cent of its revenues and operating profits. It is also present in Chemicals which is essentially a backward integration of VSF. Key Milestones

1954

• VSF production commences at Nagda (Madhya Pradesh).

1972 •VSF and Pulp plant at Harihar (Karnataka), Nagda commences production of rayon grade caustic

soda.

1977 •Grasim's third rayon plant – at Harihar, Karnataka – goes into production.

1985 •Vikram Cement — Grasim's first cement plant goes on stream at Jawad (Madhya Pradesh).

1995 •Grasim commissions two greenfield cement plants — Grasim Cement at Rawan (Chattisgarh) and at

Shambhupura (Rajasthan)., spinning unit at Malanpur (Madhya Pradesh) set up.

1996 •The first phase of Grasim's fourth VSF plant is commissioned at Kharach (Gujarat).

1999 •Grasim's viscose staple fibre (VSF) and rayon grade pulp units at Mavoor are closed down owing to lack

of raw material.

1998 •Atholville Pulp Mill at Canada - a joint venture with Tembec Inc. , cement business of Group company,

Indian Rayon and Industries Limited demerged to Grasim.

2001

•Consultancy and software services spun off; becomes separate entity, Birla Technologies Limited. Grasim acquires 10% stake in L&T. Subsequently increases stake to 15.3% by October 2002. Four Ready-Mix Concrete plants commissioned with an aggregate capacity of one million cubic meters.

2002 •Grasim divests Gwalior textiles unit. Textile operations consolidated at Bhiwani to manufacture

'Grasim' and 'Graviera' brands

2003 •The board of engineering major, Larsen & Toubro Limited (L&T) decides to de-merge its cement

business into a separate cement company, UltraTech CemCo Limited, now UltraTech Cement Limited.

2005 •Acquired St. Anne Nackawic Pulp Mill, Canada with Tembec Inc

2006 •Formed joint venture company, Birla Jingwei Fibres Company Limited and acquired VSF plant in China.

2007

•Textile units at Bhiwani transferred to a subsidiary, Grasim Bhiwani Textiles Limited.

• Eighteen ready-mix concrete plants commissioned.

2009 •Grasim hives off its sponge iron business by way of slump sale

•Grasim commissions a greenfield cement plant at Kotputli (Rajasthan).

2010

•Cement capacity consolidated with the merger of Samruddhi Cement with UltraTech Cement, Consolidation of the cement business under UltraTech Cement.

2011 •Acquired Domsjo Fabriker AB (Domsjo), Sweden, in a joint venture with Group Companies

2012 •Acquired assets of Terrace Bay, a paper grade mill, in a JV with Group company Thai Rayon, in July 2012

July 19, 2013 3


Aditya Birla Group - Grasim

Pulp, Fibre & Allied Chemical

Overseas

VSF unit

Birla Jingwei (31%)

72 KTPA

AB Turkey (33%)

(At Planning Stage)

Pulp

70 KTPA

Overseas

Pulp Units

AV Cell (45%) 126 KTPA

AV NAckawic (45%) 189

KTPA

Domsjo (33.3%) 255 KTPA

Terrace Bay (40%) 280

KTPA

Birla Laos Plantation (40%)

Chemicals

Nagda 258 KTPA

Vilayat 183 KTPA

VSF, 370 KTPA

Nagda

155 KTPA

Kharach

128 KTPA

Harihar

87 KTPA

Vilayat

120 KTPA

Ultratech Cement - (60.3%)

Domestic 50.9 MTPA

11 Composite Plants

11 Split Grinding Units

102 RMC Plants

White Cement 0.5 MTPA

Overseas 3MTPA (UAE, Bangladesh, Sri Lanka)

Others

Grasim Bhiwani Textiles (100%) 18 Mn Mtrs

Idea Cellular (5%)

VSF - Grasim is the world’s largest producer of VSF, commanding a 21% global market share with an aggregate capacity of 370 KTPA. It is also the second largest producer of caustic soda (which is used in the production of VSF) in India with a capacity of 258 KTPA. Cement - Grasim entered into Cement business in 1985 with a capacity of 0.5 MTPA. Over the years, through organic and inorganic expansions, the business has grown multifold. Currently, Grasim’s subsidiary UltraTech Cement Limited ("UltraTech") has a capacity of 53.9 MTPA. Earlier, in July 2004, Grasim acquired a majority stake and management control in UltraTech. One of the largest-of-its-kind in the cement sector, this acquisition catapulted Grasim to the top of the league in India. Subsequently, Grasim demerged its cement business into UltraTech in July 2010. The merger has created the largest cement company in India, providing a platform that will help in pursuing aggressive growth going forward.

Source: Company

The company derives ~76% of its revenue from the cement business, 16% from VSF, 3% from textiles and rest from others.

Source: Company, Sushil Finance Research Estimates

Under Expansion

July 19, 2013 4


INVESTMENT RATIONALE

Higher growth from VSF business

According to USDA, global cotton production has reduced by 3% YoY to 26.3 MT in 2012/13 season. Declining production is largely driven by a market environment that favored the cultivation of competing alternatives. Global cotton production has remained in a narrow band since the last 7-8 years as can be seen from the diagram below.

Source: USDA

Cotton production in 2006/07 was similar to what it is in 2012/13 at ~26 MT, despite of close to 6% growth in the VSF segment in the same period. Cotton production in 2012 once again exceeded consumption, which in turn led to a further increase in cotton inventories. Ending Cotton stocks have risen to a new record level of 18.5 MT in 2012/13, corresponding to a stock-to-use ratio of ~70%. According to market experts, the lion’s share of the high cotton inventories is located in China. The Chinese government has accumulated a national reserve of over 7 MT in the last 14 months by buying domestic and foreign cotton. International cotton prices are currently supported and stabilized by Chinese policies, but changes to these policies could have opposite results.

Source: USDA

32 33.7

30.7 32.3

35.7 34.7 34.5 32.8

30.6 30.1 33.5

35.7 34.3

10.8 11.9 10.4 10.5

13.2 13.4 13.6 13.5 13.4 10.2 10.8

15.5 18.5

0

5

10

15

20

25

30

35

40 Cotton

Area Harvested (Mn HA) Inventory MMT

July 19, 2013 5


-25

-20

-15

-10

-5

0

5

10

15

20

25

30

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

India Cotton Production Lags Other Yarn Production

Cotton Yarn Other Yarn

Global 2012/13 harvested cotton area is estimated at 34.3 million hectares, down 4% from the preceding year, with Global yield estimated at 763 kg/hectare. With alternative crops providing better gains, cotton production is likely to stay at similar levels. This has resulted into higher share of manmade Fibres.

Source: ICAC Share of Cotton in the total world Fibre consumption is shrinking on a YoY basis as seen in the diagram above, with manmade fibres taking up higher share.

Source: Ministry of textiles India provides another example of changing market dynamics caused by high cotton prices. Since April 2011, India’s production of cotton yarn has steadily declined, while production of other yarns has grown moderately. In contrast, from 2004 through 2010, India’s cotton yarn production had grown at twice the rate of other yarn production. Although India is a major textile exporter, most yarn production is used domestically. Therefore, India’s declining cotton yarn production, in absolute terms and relative to other yarn production, means cotton is being used less and holds a smaller share of a textile consumer market that it historically dominated. VSF which is akin to cotton is thus likely to witness higher demand.

42 41 40.5 40 40.5 39.8

39 39 39.5 39.5 38 37.5

35.5

33.3 33

20

25

30

35

40

45

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cotton Share of Total World Fiber Consumption

July 19, 2013 6


Source: USDA India amongst the top 5 producer of cotton has seen flattish cotton production in the last 3-4 years, with 2012/13 production at 5.9 MT. The area under cultivation has also stagnated with yield per hectare also having a declining trend. The cotton acreage in 2012-13 has been projected at 116.14 lakh hectares as against 121.7 lakh hectares in previous year. Yield per hectare has also come down in 2012/13 to 489 kgs vs 493 kgs of last year.

Source: Ministry of Textiles

All this augurs well for cellulosic fibres, thus VSF which has qualities akin to cotton or even better than cotton in terms of moisture absorption and luster is likely to see higher growth. Grasim being the single largest player of VSF in India indicates that the production and sales of VSF have grown at a CAGR of 10% and 9% respectively in the last four years. While cotton production and mill use has grown at a smaller pace of 3% and 4% respectively in the same period.

3.0

4.1 4.1

4.7 5.2

4.9 5.2

5.7 6.0

5.8 5.9

2.9 3.2

3.6 3.9 4.0 3.9

4.3 4.5 4.3

5.0 5.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

India Cotton Demand - Supply

Production (MT) Mill Use (MT)

524

503

517

493 489

470

480

490

500

510

520

530

2008-09 2009-10 2010-11 2011-12 2012-13

Yield in kgs per hectare

July 19, 2013 7


Source: Company, Sushil Finance Research Estimates Thus considering stable growth in demand of manmade fibres, Grasim industries is expanding its VSF capacity by 47%. It is increasing its VSF capacity from current 333 KTPA to 490 KTPA by H2FY14. It is setting up a greenfield plant at Vilayat of 120 KTPA and is also expanding capacity at its Harihar plant by 36.5 KTPA to 87.5 KTPA at a cost of Rs.21.7 Bn. Expansion in the Harihar plant has just completed while that of Vilayat will be completed by H2FY14. Its sales are thus likely to grow at a CAGR of 18% p.a for the next two years backed by volume growth of 15% p.a. Besides bolstering volumes, it will enable the Company to increase its presence in specialty fibres as the Vilayat plant will also produce new generation modal and micro modal besides dyed fibres, thereby improving realizations.

Robust business model VSF – backward integrated operations Grasim is amongst the lowest cost producers of VSF globally due to its backward integrated operations. To sustain the ongoing growth, it has an integrated business model, spanning the entire value chain from plantation to pulp to fibre. It also produces caustic soda, power and has self-managed water supply resources.

Source: Company, Sushil Finance Research Estimates It has 5 pulp manufacturing plants globally to assure pulp supply, one in India and 4 overseas joint ventures (3 in Canada and 1 in Sweden).

233

302 305 321

337

395

454

238

308 305 307 336

391

450

0

100

200

300

400

500

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

VSF

Production Volume (KTPA) Sales Volume (KTPA)

VSF

Pulp

- 80% integration

-60% integration post expansion

Caustic Soda - 100% integration

Capacity - 258 KTPA

Post Expansion - 441 KTPA

Power

Capacity - 195 MW

Post Expansion - 255 MW

July 19, 2013 8


Source: Company The company thus has 80% pulp integration as of date, which would reduce to 60% post expansion. It is expanding its Domsjo Fabriker capacity by 40,000 tonnes, this would fulfill the specialty pulp requirement for its specialty fibre unit at Vilayat. The acquisition of the Terrace Bay Mill, in Ontario, Canada, in a JV with one of our Group companies was a major strategic move in FY13, the mill is in the process of being converted into a dissolving grade pulp mill from paper grade pulp. It also produces caustic soda used for the production of VSF. It currently has caustic soda capacity of 258 KTPA which is likely to increase to 440 KTPA to meet the increasing demand post VSF expansion. To increase the captive use of chlorine, by-product of caustic soda, the Company is expanding its portfolio of Value Added Products. Chlorine has a very short storage life; hence production of caustic soda is dependent upon the offtake or disposal of chlorine. Chlorine which is majorly used for the manufacturing of PVC products has seen slump in demand due to weak housing demand globally, resulting into lower caustic soda production. This has resulted into higher caustic soda prices globally. In FY13, higher profitability from the chemical business had thus compensated for lower margins from the VSF business, maintaining the profitability. To reduce the dependence of chlorine offtake, the company is setting up an Epoxy plant of 51,500 TPA at Vilayat, which is expected to be commissioned in September 2013. Epoxy is a downstream product of ECH, a chlorine derivative. The company has also constructed an additional water reservoir at Nagda to create additional water storage capacity to meet water requirement during summers. This will help in ensuring uninterrupted plant operations at Nagda. The company is thus one of the most cost-efficient producers of VSF globally.

Company Region Stake Purpose

AV Cell Inc. and AV Nackawic Inc

Canada 45% Supply dissolving grade pulp to the Group’s VSF units in India, Thailand and Indonesia

Domsjo Fabriker AB

Sweden 33% 210,000 tonnes of dissolving grade pulp capacity

Expanding capacity by 40,000 tonnes - fulfill specialty pulp requirement of its specialty fibre unit at Vilayat.

AV Terrace Bay Inc.

Canada 40% Converting the 285,000 tonnes of paper grade pulp capacity into rayon grade pulp

Birla Lao Pulp & Plantation Limited

Laos 40% Provide a low cost source for wood to meet future requirements of a green field pulp plant in due course of time

Birla Jingwei Fibres Company Limited

China 31% 72,000 MTPA VSF capacities.

July 19, 2013 9


65%

13%

11%

9% 2%

Cement Demand

Housing Commercial Infrastructure Projects Industrial Construction Others

Cement Capacity Overhang – Short term blip The cement sector notably plays a critical role in the economic growth of the country and its journey towards conclusive growth. India is the second largest cement manufacturer after China, providing about 7% of the global production. The country is also amongst the leading exporters worldwide. India’s per capita consumption of cement is the lowest amongst other developing countries at 195 kgs, signifying huge growth potential.

Source: Company

Cement production in India is fragmented with more than 160 players. However, the sector is rather concentrated in nature as the top 10 producers control about 70% of the domestic market. The recent slowdown in demand has affected the sector but small producers experienced the biggest reductions in capacity utilization, which suggests a room for consolidation in the industry.

The housing sector is the main driver of demand for cement manufacturing, as over 65% of the production is directed to housing construction. Another 13% is used in commercial construction and 11% in infrastructure projects, with approximately 9% of the cement used in industrial construction.

Since cement is a cyclical commodity, the dynamics of production are highly dependent on the overall economic activity in India. Thus, the recent slow-down in GDP growth and especially the unstable situation in the construction sector have resulted in decreasing

demand and excess capacities.

Source: EMI

The demand for cement was affected by the economic slowdown in the recent years, subdued construction activity and delay in execution of infrastructure projects. Due to the long-period needed for opening new capacities, they are usually built ahead of demand. Thus, new capacities continued to be installed even after the economy started to contract. The over-supply led to shrinking capacity utilization and according to market information in FY12 it fell to 70%.

July 19, 2013 10


Source: Company, Industry sources, Sushil Finance However now considering the political and current economic scenario setting up a new Greenfield project is quite a challenge due to o Cumbersome Land acquisition process o Delay in environmental approvals o Logistical viability (higher freight cost) o Fuel availability and o Higher Project cost. We believe that apart from the 60MT announced capacity addition for the next two years by the cement players, there is not going to be any huge capacity addition after FY15. This will result into slower capacity addition, thus resulting in higher capacity utilization rates and profitability. Cement is a cyclical commodity with a high correlation with GDP, growing at around 1.2x of GDP.

Source: Bloomberg, Sushil Finance Research Estimates Being an election year we believe infrastructure spending is likely to spur. The 12th Five Year Plan suggests doubling of the funds allocated for infrastructure in 2013-2017 to Rs.56 trn (USD 1tr). It includes projects for freight corridors, upgraded and new airports and ports, large number of highways, which are expected to enhance economic activity and lead to increase in cement demand. According to official estimates there will be a shortage of 40 mn dwelling units in rural areas and 29 mn units in urban area, which will drive housing demand. To cater for the rising

1.1

1.4 1.4

0.6

1.1 1.1

0

0.5

1

1.5

2

FY08 FY09 FY10 FY11 FY12 FY13

GDP - Cement Correlation

1.2x Avg Cement/GDP (x) Actual Cement/GDP (x)

July 19, 2013 11


20.2%

25.8%

13.5%

26.3%

14.2%

Region-wise Capacity

North South East West Central

demand, the government projects that cement capacity has to increase to about 480 MTPA i.e. approximately additional 130 MT is to be installed in the next five years. Thus higher infrastructure spending, robust growth in rural housing and peaking interest rates are likely to augur well for the cement industry going ahead. We thus believe that cement demand is likely to grow at-least at 6.5% this year, with much better growth potential in years to come.

Huge Expansion in the Cement Business The company’s cement division, Ultratech Cement is the largest player in India and amongst top cement players globally, with cement manufacturing capacity of ~54 MTPA. The company’s operations are well spread across India, with 17% of market share and strong nationwide distribution network. In order to capture higher market share the company is increasing its capacity by 20%. It is expanding its capacity from the current 53.9 MTPA to 64 MTPA at a cost of Rs.67.6 Bn. It is setting up two plants one in Chattisgarh of 4.8 MTPA and other in Karnataka of 4.4 MTPA. This is likely to be commissioned by H2FY14. It has also announced brownfield expansion at its Shambhupura, Rajasthan plant of 2.9 MTPA to be commissioned by FY16 at a cost of Rs.20Bn. Its cement capacity has increased at 24% CAGR in the last five years through own expansion and merger with Samruddhi cement. Backed by increase in capacity its sales volume has increased at a CAGR of 23% in the last five years. Source: Company, Sushil Finance Research Estimates Thus now with a capacity addition of 20%, we believe its sales volume is likely to grow at CAGR of 7% for the next two years with sales growing at a CAGR of 9% in the same period.

Top Global Cement Companies

Capacity (MT)

CNMB - China 260

Lafarge-France 225

Holcim - Switzerland 216

Anhui Conch - China 180

Heidelberg - Germany

118

Jidong - China 100

Cemex - Mexico 96

Sinoma - China 87

ItalCementi - Italy 74

C R Cement - China 69

Ultratech - India 54

July 19, 2013 12


Cement Prices to remain firm - Cement prices are likely to remain firm on –

Improvement in Cement Demand Cost push

Increase in capital cost Improving utilization level

Approximately 50% of India’s installed capacity has come up in the last 5 years from 198 MT in FY08 to 347 MT in FY13, this new capacity requires EBITDA/tonne of Rs.1000 to justify the return on capital.

Also the rising cost of power, fuel and freight is likely to push the realizations. Ultratech sources ~35% of its coal requirement through linkages and e-auction. Imported coal prices were lower by around 20-25% in USD term; however, the benefit of such reduction was partially negated due to rupee depreciation.

Source: Bloomberg

The company’s power and fuel cost/tonne for producing cement increased by about 10% in FY12 due to higher coal prices, however was flattish in FY13 due to lower international coal prices and greater use of low cost alternate fuel. The Company has constantly optimized the fuel-mix in kilns and power plants so as to reduce the use of high cost imported coal and maximize the use of low cost fuel i.e pet coke, alternate fuel, etc. Pet coke consumption in kilns and power plants improved to ~35% in FY13. This has helped in lowering the consumption of imported coal by around 8%. Power from State Electricity Boards became costlier by around 15% over FY12, but the overall power cost was maintained at FY12 level with the improvement in efficiency and increased use of low cost fuel. Presently approximately 80% of the total power requirement is met through the captive thermal power plants. We thus expect its energy cost to remain flattish due to higher pet coke usage and full year effect of lower international coal prices.

Freight costs

Diesel prices increased to Rs.52/litre last fiscal, from Rs.43.5/litre in April 2012, pushing up freight costs. Besides, an increase in railway freight charges, a hike in the busy season charge and development surcharge has also taken its toll.

The freight cost/tonne has therefore increased by 12% YoY in FY13. With increasing diesel prices the freight cost/tonne is likely to increase further in FY14 as well.

July 19, 2013 13


Source: Company, Sushil Finance Research Estimates We thus believe that prices are likely to move in line with the increasing input cost, as happened in the past. Cement price in the last 4 years have grown at 4% p.a. Operating profit margins are thus likely to remain flattish for the next two years for Ultratech cement.

Source: JK Laksmi Cement, Sushil Finance Research Estimates

0

200

400

600

800

1000

1200

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Operational Cost (Rs./tonne)

Energy Cost RM cost Freight Cost

July 19, 2013 14


VALUATIONS

Grasim Industries has a balanced business portfolio with exposure to textiles – stable cashflow generating business, chemicals and cement. Till date the company was deploying cashflows from the VSF business to fund its cement expansion. As majority of the capex is close to completion, its balance sheet is likely to strengthen further with debt peaking out in FY13. The company’s gross D/E is likely to come down from 0.5x in FY13 to 0.3x in FY15. Source: Sushil Finance Research Estimates As of FY13 the company has Cash & Cash Equivalents of Rs.66.7 Bn providing comfort for future expansion. With this timely expansion the company is ready to ride the next uptick in cement and VSF cycle. Company’s sturdy business model, market leadership, strong balance sheet and good profitability margins instills confidence. The stock is currently trading at FY15E EV/EBITDA of 3.6x.

Source: Sushil Finance Research Estimates

July 19, 2013 15


We thus recommend ACCUMULATE for the stock, with strong BUY on dips for a longer term horizon and a target price of Rs.3341. We have valued the stock on SOTP basis, valuing the VSF business at 4x EV/EBITDA and Cement business at 9x EV/EBITDA with 30% holding company discount.

Source: Sushil Finance Research Estimates

RISK AND CONCERNS ► Higher Freight Cost (Railway and Diesel) ► Higher Coal Price ► Rupee Depreciation ► Delay in revival of real estate sector ► COMPAT judgment against cement players

VALUATIONS (Rs.Bn)

VSF

EV/EBITDA multiple (x) 4.0

EBITDA FY15E 15.7

EV ---(1) 62.8

Cement

EV/EBITDA multiple (x) 9.0

EBITDA FY15E 57.8

EV 520.4

Holding (%) 60%

Grasim Cement EV 312.2

Holding Discount (%) 30%

Grasim Cement EV ---(2) 218.6

Total EV ---(1+2) 281.4

Debt 74.9

Cash + Liquid Invt 72.4

Group Holdings @ 30% Discount 27.7

Mcap 306.5

Target Rs. 3,341.2

July 19, 2013 16


0

PROFIT & LOSS STATEMENT (Consl.) Rs.Bn

Y/E March FY12 FY13 FY14E FY15E

Net Sales 252.5 279.0 297.6 331.0

Raw material 54.6 62.9 66.1 74.3

Staff Cost 13.8 16.7 17.8 19.3

Power & Fuel 54.6 56.0 59.4 65.3

Total Expenditure 196.6 219.8 233.4 258.4

PBIDT 55.8 59.3 64.2 72.6

Interest 3.1 3.2 3.5 3.1

Depreciation 11.5 12.5 14.6 16.9

Other Income 7.5 6.2 6.7 7.7

PBT incl OI 48.6 49.7 52.8 60.2

Tax 13.2 14.7 15.2 17.6

RPAT 35.4 35.0 37.6 42.5

Ext Exp./ (Income) - (2.0) 0.8 0.0

Minority Interest 9.5 10.7 10.8 12.5

RPAT 26.6 27.0 26.7 30.1

BALANCE SHEET STATEMENT (Consl.) Rs.Bn

As on 31st March FY12 FY13 FY14E FY15E

Share Capital 1.3 1.3 1.3 1.3

Reserves & Surplus 169.4 195.2 219.8 247.7

Net Worth 170.7 196.5 221.1 249.0

Secured Loans 34.2 51.6 42.5 29.1

Unsecured Loans 36.2 43.9 49.9 45.9

Total Loan funds 70.3 95.6 92.3 74.9

Deferred Tax 19.8 23.1 26.7 29.6

Capital Employed 313.2 377.4 413.1 439.0

Net Block 175.5 205.6 251.8 287.7

Cap. WIP 24.6 60.8 52.8 33.2

Investments 78.8 80.1 78.0 86.0

Sundry Debtors 17.3 21.9 22.8 25.4

Cash & Bank Bal 3.3 2.3 2.3 2.0

Loans & Advances 34.9 32.1 32.6 35.4

Inventory 30.7 37.4 39.0 43.3

Curr Liab & Prov 52.2 63.2 66.7 74.3

Net Current Assets 34.3 30.8 30.5 32.2

Total Assets 313.2 377.4 413.1 439.0

FINANCIAL RATIO STATEMENT (Consl.)

Y/E March FY12 FY13 FY14E FY15E

Growth (%)

Net Sales 17.2 10.5 6.6 11.2

EBITDA 11.7 6.3 8.3 13.1

Net Profit 16.5 1.7 (1.2) 12.6

Profitability (%)

EBIDTA Margin (%) 22.1 21.2 21.6 21.9

Net Profit Margin (%) 10.5 9.7 9.0 9.1

ROCE (%) 17.5 10.8 10.1 10.5

ROE (%) 16.8 14.7 12.8 12.8

Per Share Data (Rs.)

EPS (Rs.) 289.7 294.6 291.2 327.9

CEPS (Rs.) 417.4 431.1 450.5 512.7

BVPS (Rs) 1,860.9 2,142.9 2,410.4 2714.7

Valuation

PER (x) 9.7 9.5 9.6 8.6

PEG (x) 0.6 5.7 - 0.7

P/BV (x) 1.5 1.3 1.2 1.0

EV/EBITDA (x) 4.7 4.8 4.4 3.6

EV/Net Sales (x) 1.0 1.0 1.0 0.8

Turnover

Debtor Days 25 29 28 28

Creditor Days 65 64 64 64

Gearing Ratio

D/E 0.4 0.5 0.4 0.3

Source: Company, Sushil Finance Research Estimates

CASH FLOW STATEMENT (Consl.) Rs.Bn

Y/E March. FY12 FY13 FY14E FY15E

Profit before tax & Extraordinary Items

48.6 49.7 52.8 60.2

Depreciation & Amortization

11.5 12.5 14.6 16.9

Chg. in Working Capital

(13.7) 2.5 0.4 (2.0)

Cash Flow from Operating

23.9 44.6 44.6 47.9

(Incr)/ Decr in Gross PP&E

(18.2) (43.0) (60.8) (52.8)

(Incr)/Decr In Investments

0.6 (1.3) 2.1 (8.0)

Cash Flow from Investing

(33.6) (80.5) (50.8) (41.2)

(Decr)/Incr in Debt 2.5 25.3 (3.3) (17.4)

(Decr)/Incr in Share Capital

- - - -

Dividend (2.5) (2.1) (2.2) (2.2)

Cash Flow from Financing

10.0 35.0 6.2 (7.1)

Cash at the End of the Year

3.3 2.3 2.3 2.0

July 19, 2013 17


Annexure – Plant Location – Grasim & its Subsidiaries

July 19, 2013 18


Rating Scale

This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating.

Risk Rating

Risk Description Predictability of Earnings / Dividends; Price Volatility

Low Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%

Accumulate 10 % to 15 % 15% to 20% 20% to 25%

Hold 0% to 10 % 0% to 15% 0% to 20%

Sell Negative Returns Negative Returns Negative Returns

Neutral Not Applicable Not Applicable Not Applicable

Not Rated Not Applicable Not Applicable Not Applicable

Please Note

Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses).

** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points.

Stock Review Reports: These are Soft coverage’s on companies where Management access is difficult or Market capitalization is below Rs. 2000 mn. Views and recommendation on such companies may not necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews may be just one-time coverage’s with an occasional Update, wherever possible.

Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.

The Investment horizon of this report is approximately 1 year. Any calls which lapse the time duration of a year would be auto closed without any further notifications/updates. Clients are requested to keep track of the same.

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